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Chapter 10

Plant Assets, Natural


Resources, and
Intangible Assets

Chapter
10-1 Accounting Principles, Ninth Edition
Plant Assets, Natural Resources, and
Intangible Assets

Statement
Natural Intangible
Plant Assets Presentation and
Resources Assets
Analysis

Determining the Depletion Accounting for Presentation


cost of plant intangibles Analysis
assets Research and
Depreciation development
Expenditures costs
during useful life
Plant asset
disposals

Chapter
10-2
Section 1 – Plant Assets

Plant assets include land, land improvements,


buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.

Referred to as property, plant, and equipment; plant and


equipment; and fixed assets.

Chapter
10-3
Determining the Cost of Plant Assets

Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(1) the purchase price;
(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or
encumbrances on the property.
Chapter
10-4 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Illustration: Assume that Hayes Manufacturing Company


acquires real estate at a cash cost of $100,000. The
property contains an old warehouse that is razed at a net
cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the
attorney’s fee, $1,000, and the real estate broker’s
commission, $8,000. The cost of the land is $115,000,
computed as follows.
Required: Determine amount to be reported as the cost of
the land.

Chapter
10-5 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Required: Determine amount to be reported as the cost of


the land.
Land
Cash price of property of $100,000 $100,000
Old warehouse razed at a cost of $6,000 6,000
Attorney's fees of $1,000 1,000
Real estate broker’s commission of $8,000 8,000
Cost of Land $115,000

Chapter
10-6 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
Examples are driveways, parking lots, fences,
landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land
improvements over their useful lives.

Chapter
10-7 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Buildings
Includes all costs related directly to purchase or
construction.
Purchase costs:
Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees,
building permits, and excavation costs.
Chapter
10-8 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Equipment
Include all costs incurred in acquiring the equipment
and preparing it for use.
Costs typically include:
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Chapter
10-9 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets

Illustration: Assume Merten Company purchases factory


machinery at a cash price of $50,000. Related expenditures
are for sales taxes $3,000, insurance during shipping $500,
and installation and testing $1,000. Determine amount to be
reported as the cost of the machinery.
Machinery
Cash price $50,000
Sales taxes 3,000
Insurance during shipping 500
Installation and testing 1,000
Cost of Machinery $54,500

Chapter
10-10 SO 1 Describe how the cost principle applies to plant assets.
Depreciation

Depreciation is the process of allocating the cost of


tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the
use of the asset.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing
ability of asset will decline over the asset’s
useful life.

Chapter
10-11 SO 2 Explain the concept of depreciation.
Depreciation

Factors in Computing Depreciation


Illustration 10-6

Cost Useful Life Salvage Value

Chapter
10-12 SO 2 Explain the concept of depreciation.
Depreciation

Depreciation Methods
Objective is to select the method that best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Illustration 10-8
Use of depreciation
methods in 600 large
U.S. companies

Chapter
10-13 SO 3 Compute periodic depreciation using different methods.
Depreciation

Illustration: Barb’s Florists purchased a small delivery


truck on January 1, 2010.
Illustration 10-7

Required: Compute depreciation using the following.


(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.

Chapter
10-14 SO 3 Compute periodic depreciation using different methods.
Depreciation

Straight-Line

Expense is same amount for each year.


Depreciable cost is cost of the asset less its
salvage value. Illustration 10-9

Chapter
10-15 SO 3 Compute periodic depreciation using different methods.
Depreciation

Illustration: (Straight-Line Method)


Illustration 10-10

Depreciable Annual Accum. Book


Year Cost x Rate = Expense Deprec. Value
2010 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2011 12,000 20 2,400 4,800 8,200
2012 12,000 20 2,400 7,200 5,800
2013 12,000 20 2,400 9,600 3,400
2014 12,000 20 2,400 12,000 1,000

2010 Depreciation expense 2,400


Journal
Entry Accumulated depreciation 2,400
Chapter
10-16 SO 3 Compute periodic depreciation using different methods.
Depreciation

Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
Illustration 10-11

cost less salvage


value.

Chapter
10-17 SO 3 Compute periodic depreciation using different methods.
Depreciation

Illustration: (Units-of-Activity Method)


Illustration 10-12

Hours Rate per Annual Accum. Book


Year Used x Hour = Expense Deprec. Value
2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2011 30,000 0.12 3,600 5,400 7,600
2012 20,000 0.12 2,400 7,800 5,200
2013 25,000 0.12 3,000 10,800 2,200
2014 10,000 0.12 1,200 12,000 1,000

2010 Depreciation expense 1,800


Journal
Entry Accumulated depreciation 1,800
Chapter
10-18 SO 3 Compute periodic depreciation using different methods.
Depreciation

Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line
rate.
Rate applied to book value.
Illustration 10-13

Chapter
10-19 SO 3 Compute periodic depreciation using different methods.
Depreciation

Illustration: (Declining-Balance Method)


Declining Illustration 10-14

Beginning Balance Annual Accum. Book


Year Book value x Rate = Expense Deprec. Value
2010 13,000 40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000

2010 Depreciation expense 5,200


Journal
Entry Accumulated depreciation 5,200

Chapter
10-20 * Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation

Comparison of Depreciation Methods


Illustration 10-15

Illustration 10-16

Chapter
10-21 SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year

The following five slides are included to


illustrate the calculation of partial-year
depreciation expense.
The amounts are consistent with the previous
slides illustrating the calculation of depreciation
expense.

Chapter
10-22 SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year

Illustration: Barb’s Florists purchased a small delivery


truck on October 1, 2010.
Illustration 10-7

Required: Compute depreciation using the following.


(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.

Chapter
10-23 SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year

Illustration: (Straight-line Method)


Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2010 $ 12,000 x 20% = $ 2,400 x 3/12 = $ 600 $ 600
2011 12,000 x 20% = 2,400 2,400 3,000
2012 12,000 x 20% = 2,400 2,400 5,400
2013 12,000 x 20% = 2,400 2,400 7,800
2014 12,000 x 20% = 2,400 2,400 10,200
2015 12,000 x 20% = 2,400 x 9/12 = 1,800 12,000
$ 12,000
Journal entry:

2010 Depreciation expense 600


Accumultated depreciation 600

Chapter
10-24 SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year

Illustration: (Units-of-Activity Method) Illustration 10-12

Hours Rate per Annual Accum. Book


Year Used x Hour = Expense Deprec. Value
2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2011 30,000 0.12 3,600 5,400 7,600
2012 20,000 0.12 2,400 7,800 5,200
2013 25,000 0.12 3,000 10,800 2,200
2014 10,000 0.12 1,200 12,000 1,000

2010 Depreciation expense 1,800


Journal
Entry Accumulated depreciation 1,800
Chapter
10-25 SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year

Illustration: (Declining-Balance Method)


Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2010 $ 13,000 x 40% = $ 5,200 x 3/12 = $ 1,300 $ 1,300
2011 11,700 x 40% = 4,680 4,680 5,980
2012 7,020 x 40% = 2,808 2,808 8,788
2013 4,212 x 40% = 1,685 1,685 10,473
2014 2,527 x 40% = 1,011 1,011 11,484
2015 1,516 x 40% = 607 Plug 516 12,000
$ 12,000
Journal entry:

2010 Depreciation expense 1,300


Accumultated depreciation 1,300

Chapter
10-26 SO 3 Compute periodic depreciation using different methods.
Depreciation

Depreciation and Income Taxes


IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.

IRS requires the straight-line method or a special


accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.

Chapter
10-27 SO 3 Compute periodic depreciation using different methods.
Depreciation

Revising Periodic Depreciation


Accounted for in the period of change and
future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.

Chapter
10-28 SO 4 Describe the procedure for revising periodic depreciation.
Depreciation

Illustration: Assume that Barb’s Florists decides on


January 1, 2013, to extend the useful life of the truck one
year because of its excellent condition. The company has
used the straight-line method to depreciate the asset to
date, and book value is $5,800 ($13,000 - $7,200).

Questions:
1. What is the journal entry to correct No Entry
the prior years’ depreciation? Required
2. Calculate the depreciation expense
for 2013.

Chapter
10-29 SO 4 Describe the procedure for revising periodic depreciation.
Depreciation

Book value, 1/1/13 $5,800 First,


Salvage value - 1,000 establish
Book Value
Depreciable cost 4,800
at the date
Useful life (revised) / 3 years of change in
Annual depreciation $ 1,600 estimate.

Illustration 10-17

Journal entry for 2013

Depreciation expense 1,600


Accumulated depreciation 1,600

Chapter
10-30 SO 4 Describe the procedure for revising periodic depreciation.
Expenditures During Useful Life

Ordinary Repairs - expenditures to maintain the


operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.

Additions and Improvements - costs incurred to


increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.

Chapter SO 5 Distinguish between revenue and capital expenditures,


and explain the entries for each.
10-31
Plant Asset Disposals

Companies dispose of plant assets in three ways —


Retirement, Sale, or Exchange (appendix).
Illustration 10-18

Record depreciation up to the date of disposal.


Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Chapter
10-32 SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement

Illustration: Assume that Hobart Enterprises retires


its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry
to record this retirement is?

Accumulated depreciation 32,000


Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is still


useful to the company?

Chapter
10-33 SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement

Illustration: Assume that Sunset Company discards delivery


equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is?

Accumulated depreciation 14,000


Loss on disposal 4,000
Delivery equipment 18,000

Companies report a loss on disposal in the “Other expenses and


losses” section of the income statement.

Chapter
10-34 SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals

Sale of Plant Assets


Compare the book value of the asset with the
proceeds received from the sale.
If proceeds exceed the book value, a gain on
disposal occurs.
If proceeds are less than the book value, a loss
on disposal occurs.

Chapter
10-35 SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale

Illustration: Assume that on July 1, 2010, Wright Company


sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2010, it had
accumulated depreciation of $41,000. Depreciation for the
first six months of 2010 is $8,000. Prepare the journal entry
to record depreciation expense up to the date of sale.

Depreciation expense 8,000


Accumulated depreciation 8,000

Chapter
10-36 SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale

Illustration 10-19
Computation of gain on
disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000


Accumulated depreciation 49,000
Office equipment 60,000
Gain on disposal 5,000

Chapter
10-37 SO 6 Explain how to account for the disposal of a plant asset.
Section 2 – Natural Resources

Natural resources consist of standing timber and


underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Physically extracted in operations.
Replaceable only by an act of nature.

Chapter
10-38
Section 2 – Natural Resources

Cost - price needed to acquire the resource and


prepare it for its intended use.
Depletion - allocation of the cost to expense in a rational
and systematic manner over the resource’s useful life.

Depletion is to natural resources as depreciation


is to plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units
extracted.

Chapter
10-39 SO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources

Illustration: Assume that Lane Coal Company invests $5


million in a mine estimated to have 10 million tons of coal and
no salvage value. In the first year, Lane extracts and sells
800,000 tons of coal. Lane computes the depletion expense
as follows:
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense

Journal entry:
Depletion expense 400,000
Accumulated depreciation 400,000
Chapter
10-40 SO 7 Compute periodic depletion of natural resources.
Section 2 – Natural Resources

Illustration 10-22
Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported


as inventory in the current assets section.

Chapter
10-41 SO 7 Compute periodic depletion of natural resources.
Section 3 – Intangible Assets

Intangible assets are rights, privileges, and


competitive advantages that do not possess physical
substance.

Intangible assets are categorized as having either a


limited life or an indefinite life.
Common types of intangibles:

Patents Trademarks or trade names


Copyrights Goodwill
Franchises or licenses

Chapter
10-42 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.

Internally Created Intangibles:


Generally expensed.
Only capitalize direct costs incurred in perfecting title
to the intangible, such as legal costs.

Chapter
10-43 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.

Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.

Chapter
10-44 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.

Chapter
10-45 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Illustration: Assume that National Labs purchases a patent


at a cost of $60,000. National estimates the useful life of
the patent to be eight years. National records the annual
amortization as follows.

Amortization expense 7,500


Patent 7,500

Chapter
10-46 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Copyrights
Give the owner the exclusive right to reproduce and
sell an artistic or published work.
 plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Copyright is granted for the life of the creator plus
70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.

Chapter
10-47 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Trademarks and Trade Names


Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
 Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jeep.
Trademark or trade name has legal protection for
indefinite number of 20 year renewal periods.
Capitalize acquisition costs.
No amortization.

Chapter
10-48 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Franchises and Licenses


Contractual arrangement between a franchisor and a
franchisee.
 Shell, Taco Bell, or Rent-A-Wreck are franchises.

Franchise (or license) with a limited life should be


amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at
cost and not amortized.

Chapter
10-49 SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets

Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.

Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...


purchase price over the FMV of the identifiable net
assets acquired.

Internally created goodwill should not be capitalized.

Chapter
10-50 SO 8 Explain the basic issues related to accounting for intangible assets.
Research and Development Costs

Frequently results in something that a company


patents or copyrights such as:

new product, formula,


process, composition, or
idea, literary work.

All R & D costs are expensed when incurred.

Chapter
10-51 SO 8 Explain the basic issues related to accounting for intangible assets.
Statement Presentation and Analysis

Presentation
Illustration 10-24

Companies usually include natural resources under “Property, plant,


and equipment” and show intangibles separately.

Chapter SO 9 Indicate how plant assets, natural resources,


and intangible assets are reported.
10-52
Statement Presentation and Analysis

Analysis
Illustration 10-25

Each dollar invested in assets produced $0.56 in sales.


If a company is using its assets efficiently, each dollar
of assets will create a high amount of sales.

Chapter SO 9 Indicate how plant assets, natural resources,


and intangible assets are reported.
10-53
Exchange of Plant Assets

Ordinarily, companies record a gain or loss on


the exchange of plant assets.
The rationale for recognizing a gain or loss is
that most exchanges have commercial
substance.
An exchange has commercial substance if the
future cash flows change as a result of the
exchange.

Chapter
10-54 SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets

Illustration: Roland Co. exchanged old trucks (cost $64,000


less $22,000 accumulated depreciation) plus cash of
$17,000 for a new semi-truck. The old trucks had a fair
market value of $26,000.
Illustration

Cost of old trucks $64,000


10A-1 & 10A-2

Less: Accumulated depreciation 22,000


Book value 42,000
Fair market value of old trucks 26,000
Loss on disposal $16,000

Fair market value of old trucks $26,000


Cash paid 17,000
Cost of new semi-truck $43,000
Chapter
10-55 SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets

Illustration: Roland Co. exchanged old trucks (cost $64,000


less $22,000 accumulated depreciation) plus cash of
$17,000 for a new semi-truck. The old trucks had a fair
market value of $26,000.
Prepare the entry to record the exchange of assets by
Roland Co.
Semi-truck 43,000
Accumulated depreciation 22,000
Loss on disposal 16,000
Used trucks 64,000
Cash 17,000
Chapter
10-56 SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets

Illustration: Mark Express Delivery trades its old delivery


equipment (cost $40,000 less $28,000 accumulated
depreciation) for new delivery equipment. The old equipment
had a fair market value of $19,000. Mark also paid $3,000.

Cost of old equipment $40,000 Illustration


10A-3 & 10A-4
Less: Accumulated depreciation 28,000
Book value 12,000
Fair market value of old equipment 19,000
Gain on disposal $ 7,000

Fair market value of old equipment $19,000


Cash paid 3,000
Cost of new equipment $22,000
Chapter
10-57 SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets

Illustration: Mark Express Delivery trades its old delivery


equipment (cost $40,000 less $28,000 accumulated
depreciation) for new delivery equipment. The old equipment
had a fair market value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by Mark
Express.
Delivery equipment (new) 22,000
Accumulated depreciation 28,000
Delivery equipment (used) 40,000
Gain on disposal 7,000
Cash 3,000
Chapter
10-58 SO 10 Explain how to account for the exchange of plant assets.
Copyright

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Chapter
10-59